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EDUCATION PLANNING

9/28/17 SAVING FOR COLLEGE? KNOW YOUR OPTIONS

As investment executives who specialize in helping our clients meet

their financial goals, we understand that you may have questions

about the areas you need to focus on during this phase in your life.

This special report will provide an understanding of the various options

for saving for college expenses, and also explain how the financial aid

process works by breaking down how a family’s income and savings

can impact a potential financial aid award.

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EDUCATION PLANNING When declaring a national goal of full educational opportunity back in the 1960s, President Lyndon

Johnson said, “Education is the key to opportunity in our society.” President Johnson’s sentiment continues to

be a widely accepted belief today and most families with young children have goals of providing the

best educational opportunities for their children. Providing these opportunities comes at a cost, however,

and the reality for most families is that any discussion about attending college is going to include a plan

for how to pay for it.

Successfully putting children through college goes beyond saving for the expense, then paying the tuition

bills when they are in school. It starts with understanding which savings vehicles will work best for you,

and figuring out how much you can save. It continues with learning about the financial aid process, student

loan options, scholarships, grants, and tax breaks offered to families paying tuition bills. Like any other

high-cost item, college tuition can be thought of as a financial goal; and like any financial goal, planning

for the expense of that goal as early as possible is usually the key to success.

Navigating the world of education planning can be a daunting and intimidating task for families. The

goal of this paper is to provide an understanding of the various options for saving for college expenses,

and also explain how the financial aid process works by breaking down how a family’s income and

savings can impact a potential financial aid award.

1. THE RISING COST OF EDUCATION

College tuition costs have risen at a pace of more than double the rate of inflation for decades. While

that rate of increase has recently subsided, (and varies for public and private schools), the total cost of

paying for higher education continues to be one of the biggest financial investments for most families.

According to Trends in College Pricing 2016, a study produced by The College Board, a nonprofit

organization, the average published tuition, fees, room and board for in-state students at public four-

year colleges and universities for 2016-17 totals $20,090 per year, a 2.7% increase from the prior

year.

The study also indicates that average published tuition, fees, room and board for private four-year

colleges and universities in 2016-17 are $45,370 per year, which is a 3.4% increase over the prior year.

Faced with these substantial costs for higher education, most families will try to save well in advance for

these future expenses, but don’t always know which savings vehicle is right for them. Let’s take a closer

look at the various options available for college savings. In a later section of this paper, we will examine

the financial aid impact of each of these account types.

2. SAVING FOR COLLEGE, KNOWING YOUR OPTIONS

529 PLANS:

A popular type of account used to save for college expenses is a 529 plan, which derives its name from

section 529 of the Internal Revenue Code – the section that provides the rules for these plans. Almost all

states offer a 529 plan, and although they are state-sponsored plans, they are managed by a mutual

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fund company that provides the investment options within the plan. There are two types of 529 plans:

state savings plans and prepaid tuition plans. We will focus this discussion on the state savings plans.

It’s important to note that although each 529 plan is offered by a particular state, you are not required

to invest in the 529 plan sponsored by your home state. However, because some states offer certain tax

benefits for residents that invest in their home state’s plan, investors should start by looking at the plan

offered by their state. Further consideration should be given to the quality and variety of investment

options within the plan. Also, it is important to note that using a 529 plan of a particular state does not

require that the student, who is the beneficiary of that plan, attend a college in that state. For example, a

family residing in Massachusetts could invest in the Nebraska 529 plan and use the funds to pay for a

college located in Vermont.

TAX BENEFITS OF 529 PLANS:

529 plans are widely used due to the host of tax benefits they provide. Contributions to 529 plans come

from after-tax dollars, however, the earnings on your contributions grow tax-deferred and distributions

from the plan are tax-free, provided that the distributed funds are used to pay for qualified higher

education expenses.

Qualified higher education expenses are defined by the IRS as, “expenses incurred for the enrollment

and attendance of a full or part-time student at an eligible educational institution.” Some of the more

common expenses for both full and part-time students are:

Tuition and related fees

Room & board

Books & supplies

Computers and related computer equipment

Textbooks (provided they are required for reading for the course)

It’s important to also be aware of common college-related expenses that are not considered qualified

higher education expenses. Among the expenses that do not qualify are:

Insurance payments

Sports expenses or monthly health club dues

Electronics and smart phones

Transportation and traveling costs

Repayment of student loans

Room & board expenses in off-campus housing in excess of the school housing cost1

Distributions from a 529 plan for nonqualified higher education expenses are subject to ordinary income

tax and a 10% tax penalty assessed to the earnings portion of the nonqualified distribution.

While the tax-deferred growth and tax-free distributions are available for all plans, some states also

offer a state income tax deduction on contributions to a 529 plan for residents who contribute to their

home state’s plan.

For example, New York residents may deduct up to $5,000 per year ($10,000 if married filing jointly)

of contributions to any of New York’s 529 plans. Note that the specific amount of a tax deduction or tax

1 Savingforcollege.com, “Avoid these withdrawal traps.”

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credit for contributions to a 529 plan will vary among the states that offer this benefit. If your resident

state offers a state tax deduction/tax credit on contributions to a 529 plan, you must invest in one of

your home state’s plan to claim the deduction. 2A comprehensive list of state tax deduction availability

and amounts can be found at www.savingforcollege.com.

While 529 plans have gained in popularity over the last several years, there are other vehicles available

to families who are saving for future college expenses. The features, benefits, and tradeoffs with these

accounts are outlined below.

COVERDELL EDUCATION SAVINGS ACCOUNTS (COVERDELL ESA):

A Coverdell ESA is a type of education savings account that features certain tax advantages. These

accounts can be established for any child under age 18. Contributions to these accounts are after-tax

and nondeductible, but earnings in the account grow tax-deferred and distributions from the account are

income tax-free provided that the money is used for a qualified education expense. One of the primary

differences between Coverdell ESAs and 529 plans are that education expenses for grades K-12 are

qualifying expenses for Coverdell ESAs (529 plan assets can only be used for college and graduate

school expenses).

BENEFITS OF COVERDELL ESA ACCOUNTS:

Contributions to the account grow tax-deferred.

Distributions for qualified education expenses are tax-free.

Qualified expenses include elementary and secondary school expenses, (grades K-12).

Contributions are considered completed gifts to the minor beneficiary of the account and qualify

for the gift tax exclusion for the donor.

Favorable treatment of account assets for calculating financial aid eligibility. (More details below

in the financial aid section).

CONSIDERATIONS AND TRADEOFFS OF COVERDELL ESA ACCOUNTS:

Total contributions are limited to $2,000 annually.

Eligibility to contribute to a Coverdell ESA is based on the modified adjusted gross income

(MAGI) of the contributor. For 2017, MAGI over $220,000 for married couples filing a

joint return ($110,000 for all others) disqualifies them from making a contribution to a

Coverdell ESA.

o MAGI above $190,000 and up to $220,000 for married couples reduces the

amount you can contribute. For all others, the phase-out range is $95,000 to

$110,000.

All contributions to the account must be made before the beneficiary is 18.

All assets must be distributed from the account before the beneficiary is 30.

Distributions for nonqualified education expenses are subject to ordinary income tax and a 10%

penalty – assessed to the savings portion of the nonqualified distribution.

2 Residents of Arizona, Kansas, Montana, and Pennsylvania, are permitted to claim a tax deduction on contributions to their home state plan or any other 529 plan. Specific deduction amounts vary.

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UGMA/UTMA CUSTODIAL ACCOUNT:

A custodial account is an account set up for the benefit of a minor while the account is managed by a

custodian, often the parent of the minor. These accounts vary from 529 plans and Coverdell ESA accounts

in that they do not have tax advantages specifically designed for the accounts to be used for education

expenses.

An important distinction of a custodial account is that assets contributed to the account are considered

irrevocable gifts to the minor. Account assets can only be used for the benefit of the minor. The custodian

for the account does not own the account assets and when the minor child reaches the age of majority,

(varies by state, typically between 18 and 22), the custodian is removed from the account and must

release the account to the child with no further restriction.

BENEFITS OF UGMA/UTMA CUSTODIAL ACCOUNTS:

There are no contribution limits (either annually or total account value).

There are no qualification limits to establish an account based on income.

Contributions to an account are considered gifts and qualify for the annual gift exclusion.

Distributions are not restricted to be used for education expenses, but do have to be used for the

benefit of the minor, i.e., summer camp or buying a car to go off to college.

CONSIDERATIONS AND TRADEOFFS OF UGMA/UTMA CUSTODIAL

ACCOUNTS:

Minor takes control of the account at the age of majority as determined by state law (can be

as early as age 18).

Less favorable treatment for financial aid eligibility since account is considered a student-

owned asset. (More details below in the financial aid section).

Earnings and distributions from accounts are taxable. Income taxes are subject to Kiddie Tax

rules. 3

UNITED STATES SAVINGS BONDS:

Series EE and Series I savings bonds, which are issued by the Unites States government, feature tax

benefits provided that when the bonds are redeemed, the money is used for education expenses.

BENEFITS OF U.S. SAVINGS BONDS:

Proceeds from the bonds are tax-free at the federal and state levels, when used for

qualifying education expenses.

Favorable treatment for financial aid since bonds must be owned by the parent. (More details

below in the financial aid section).

3 Kiddie Tax Rules state that unearned income of a minor can be subjected to the parent’s income tax rates. In 2017: the first $1,050 of unearned income for a minor is tax-exempt, the next $1,050 is taxed at the minor’s income tax rate, and generally, unearned income over $2,100 for a child under 18 (or full-time students under age 24) is taxed at the parent’s rate.

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If redemptions from bonds are used for non-qualifying education expenses, they are

subjected to ordinary income tax, but there is not an additional penalty.

CONSIDERATIONS AND TRADEOFFS OF U.S. SAVINGS BONDS:

Qualifying expenses are limited to only tuition and fees.

Tax-free redemptions are limited by the bond owner’s modified adjusted gross income

(MAGI). 4

IRA ACCOUNTS:

Traditional IRA and Roth IRA accounts are both primarily used for retirement savings rather than college

savings. We will briefly mention them here since both accounts feature some advantages when it comes to

education expenses. The first advantage is related to withdrawals. With a traditional IRA, withdrawing

assets prior to age 59 ½ is considered an early withdrawal, subject to ordinary income taxes plus a 10%

penalty. With a Roth IRA, a withdrawal is tax-free after the account has been established for five years

and the account owner is age 59 ½ or older. An early withdrawal from a Roth IRA, subjects the earnings

portion of the withdrawal to ordinary income taxes plus a 10% penalty.

For both traditional IRAs and Roth IRAs, if an early withdrawal is made for qualifying higher education

expenses, the 10% penalty is waived (ordinary income taxes still apply).

A second advantage for both traditional and Roth IRA accounts is related to financial aid. Both account

types are considered non-countable assets when computing a family’s eligibility for financial aid.

Therefore assets in a traditional or Roth IRA are not reported on the application for federal financial aid.

THE ONE-THIRD RULE:

The various account types described above can certainly help accumulate assets for college expenses

and should be considered when preparing a game plan for achieving a college savings goal. However,

these account types might help with the ‘how’ of college planning, but what about addressing the question

of ‘how much’?

To help stay committed to saving for a financial goal, that goal has to be important — and it must seem attainable. One method to apply to college savings that is simple to understand and may provide the psychological boost needed to stay on track and keep saving is the one-third rule. This rule compartmentalizes college costs into three buckets:

1. Saving one-third of anticipated college costs (past income). 2. Paying one-third of college costs from income and financial aid (current earnings during college

years). 3. Borrowing one-third of college costs through a combination of student and parent loans (future

income).

4 For 2017, tax-free redemptions are reduced for married couples filing jointly with MAGI between $135,000 and $165,000, and eliminated for MAGI above that range. For all others, the range is $65,000 to $80,000.

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This planning tool allows you to see how you can spread the total cost of a college education over an extended period of time. 5

To illustrate this, let’s look at the projected cost of college for a child born today and compare saving for the full amount of the college expense versus saving based on the one-third rule. Using the current annual costs of college as noted above from The College Board, inflated at last year’s price increase rate of 2.7%, the projected four-year average total cost of a public university is $135,000 for a child born today. To fully fund that cost, parents would have to save more than $300 per month for 18 years and receive an average rate of return of 7 percent. Funding just one-third of that cost brings the number down to about $104 per month. For a private school projected to cost $348,000 for four years based on the current cost and inflated at last year’s rate increase of 3.4% for 18 years, the monthly savings for 18 years would need to be $808. However, saving for one-third of the cost reduces that number to about $270 per month.

3. THE ABC’S OF FINANCIAL AID

Persistent financial aid myths can intensify families’ stress surrounding the aid process. Individuals’ perceptions of the financial aid system vary widely, from those who believe saving too much will decrease their chances of receiving financial aid, to those who believe not saving at all will ensure that their full financial aid needs are met. Maximizing your financial aid eligibility begins with understanding how the system works. Financial aid falls into two categories: need-based and merit-based. There are also two main providers of financial aid: the federal government and universities. Federal financial aid, which we will focus on here, is completely need-based.

THE FAFSA FORM

The application process for federal aid begins with completing the free application for federal student

aid (FAFSA). The FAFSA is also required each year the student is in school and applies for financial aid.

Families can file the FAFSA beginning on October 1 each year to apply for financial aid for the school

year that commences in the following September. For example, a FAFSA form should be filed as soon as

possible after October 1, 2017 for the 2018-19 academic year. 6 The FAFSA can be filed by mail or

online and the student includes the colleges they are considering on the form. Those schools are notified

by the office of federal student aid, which will send information to the schools from the student’s FAFSA

form. Families will then receive a student aid report, which will include the student’s expected family

contribution, which is described below.

The information submitted on the FAFSA allows the determination of a family’s financial need based on a straightforward formula:

Cost of Attendance – Expected Family Contribution = Financial Need

5 Source: Getting Schooled on Education Planning, by David Juliano, Jan/Feb 2009 Commonwealth Business Review, a publication of Commonwealth Financial Network®. 6 Families can get an estimate of how much federal aid they may qualify for by completing the online FAFSA4Caster form, provided by the US Department of Education’s Office of Federal Student Aid on their website, (https://fafsa.ed.gov).

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A critical component of this formula—and one that many people often find confusing—is the Expected Family Contribution (EFC). The EFC is the amount of money that the family is expected to contribute to the cost of the child’s education for that year. A lower EFC yields a greater financial need—and potentially a larger financial aid package. The EFC is based on two factors: the family’s level of income and assets, and whether the income and assets belong to the parent or to the child. The EFC formula considers current assets of the student and parent as of the time that the FAFSA is being completed. The formula also considers income of parents and students as of the base year. The base year used to be the year prior to the year that the student is applying for aid. However, a change to the rules, beginning with the 2017-18 school year, now has the formula looking at parent and student income for two years before the start of the academic year, or what is now being referred to as the “prior-prior year”. For example, when completing the FAFSA in October of 2017 for the 2018–2019 academic year, student and parent income is reported for the year 2016. The following is a summary of how student and parental assets and income are considered in the federal financial aid formula:

Parent’s income: Depending on income levels, 22 percent to 47 percent of the parents’ available income is counted toward the EFC. Available income is defined as the parents’ adjusted gross income after allowances for federal, state, and FICA taxes. There is also an income protection allowance based on the number of people in the household. For a family of four, with one child in college, the income protection allowance is $27,540 for the 2017-18 school year. The parent’s adjusted available income over $32,300 is counted at 47 percent. For households with one parent or two parents, who both work, they can also use the employment expense allowance, which is the lesser of $4,000 or 35 percent of income. 7

Since parent net income (after taxes and allowances) is counted at 47%, and assets owned by the parents are counted at 5.64%, income is the biggest factor in most family’s EFC. Parent income is counted 9 times more heavily in aid formulas than parent assets are. 8

Student’s income: Fifty percent of the student’s adjusted gross income over $6,420 (the student income protection allowance for the 2017-18 school year) is counted toward the EFC.9

Parent’s assets: Parental assets are counted toward the EFC at a rate of no more than 5.64 percent. The asset protection allowance for parent’s assets is based on the age and number of parents in the household. For example, for a two-parent household where the oldest parent is age 50, an asset protection allowance of $21,200 is permitted. 10

Student’s assets: Twenty percent of all assets owned by the student are counted toward the EFC. Note that this includes UGMA and UTMA custodial accounts. Beginning with the 2009–2010 academic year, however, 529 plans owned by either a student or a parent are treated as parental assets.

Note that the income and asset protection allowances cited above for students and parents are subject to change each year and are automatically factored into the EFC formula when you complete the FAFSA. 7 U.S. Department of Education, “The EFC Formula, 2017-18”. 8 Onink, Troy, “2017 Guide to College Financial Aid, The FAFSA And CSS Profile” www.Forbes.com 9 U.S. Department of Education, “The EFC Formula, 2017-18”. 10 Ibid.

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The Expected Family Contribution is not the actual amount that a family will have to pay for college. It’s meant to be an indication of a family’s economic strength boiled down to a dollar amount for a single year of college. Once the EFC is determined and sent to colleges, it becomes part of the Financial Need calculation noted above: Cost of Attendance – Expected Family Contribution = Financial Need. Every college will have a published Cost of Attendance (COA). Once they know your EFC, they simply subtract the EFC from their COA to arrive at your demonstrated financial need. For example, if a college costs $45,000 a year, and your EFC comes out to $30,000, your demonstrated financial need is $15,000. This is your demonstrated financial need, however, and not your financial aid award. It is important to note that not all colleges will cover your full financial need, and financial aid packages can vary greatly from one college to another. If a college’s aid package covers your full demonstrated need, you will then have to pay the EFC amount. If the college aid award is less than your demonstrated need, you will have to pay more than the EFC for that year of school. More often, colleges offer financial aid packages that meet less than the full amount of demonstrated need.

4. KNOWING THE NET PRICE

Understanding the various components of a financial aid package will help you to arrive at your net price for a particular college, which is the actual amount you will pay to attend that school. For example, using the demonstrated financial need of $15,000 that we established above, college A may provide an aid package that consists of $13,000 in grants and $2,000 in loans. College B might offer an aid package of $8,000 in grants, $5,000 in loans and $2,000 from a work-study program. Both schools have offered an aid package of $15,000, but the net cost to attend college B is higher because there are more loans, and the student must work part-time to achieve part of the aid. Conducting early research on financial aid packages at various schools, even before you begin the financial aid process, is possible by looking at each school’s Net Price Calculator, an online tool which schools have been required to provide since 2011. Another tool that gives families an idea of the percentage of demonstrated financial need that has been historically covered by various schools, is the College Match tool, available at www.CollegeData.com. For example, information on the College Data website reveals that the University of New Hampshire with a cost of $32,200 for in-state students, typically meets about 78% of the demonstrated need with financial aid; while Bowdoin College in Brunswick, ME with a sticker price of $65,590 typically meets 100% of demonstrated need through financial aid. It’s important for families to not only be aware of the published cost of attendance at various schools, but to also understand the typical financial aid award at each school to compare the net costs of colleges.

HOW YOUR ASSETS IMPACT FINANCIAL AID:

Earlier in this report, we explored various types of accounts that can be used to save for college expenses. The federal financial aid formula treats various assets differently depending on the type of account and whether the account is owned by the parent or student. Below is a summary of how assets are counted in the federal financial aid formula.

529 PLANS: Assets in a 529 plan owned by the parent or student are counted at the same 5.64% rate in the

aid formula towards the family’s EFC. For example, if a family reports a 529 plan worth $30,000 on the FAFSA form, 5.64% of that amount, or $1,692 will be added to their EFC for that year.

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Grandparent-owned 529 plans are not reported on the FAFSA form and therefore do not impact the EFC for the financial aid package for that application year. However, distributions from a grandparent-owned 529 plan are counted as income to the student and therefore counted at the student income rate of 50%. For example, a $10,000 distribution from a grandparent’s 529 plan to pay for their grandchild’s tuition could reduce the financial aid award by $5,000.

Since income reported on the FAFSA is for the prior-prior year, waiting to use grandparent-owned 529 plan assets until the second half of the student’s sophomore year, will avoid having those withdrawals count as income on the aid applications for their junior and senior years. 11

COVERDELL EDUCATION SAVINGS ACCOUNTS (COVERDELL ESAS): These accounts are considered assets of the parent and are treated the same as 529 plans

with 5.64% of the asset counting towards the EFC for that year.

UGMA/UTMA CUSTODIAL ACCOUNT: Since assets in these accounts are owned by the minor, they follow the student-owned asset rule

stating that 20% of these accounts are counted towards the family’s EFC, thus making them less favorable than 529 plans for financial aid purposes.

Planning Point – Note that a custodial account assets can be transferred to a 529 plan. This transfer improves the positioning of these assets for financial aid since it reduces the assessed rate of the asset from 20% to 5.64% when it goes to the 529 plan. The 529 plan becomes a Custodial 529 plan and the assets still remain the property of the student. 12

Planning Point – Families that have accumulated large custodial accounts for their children may consider using these assets for the benefit of the child before they apply for financial aid.

U.S. SAVINGS BONDS:

These accounts are considered assets of the parent and are treated the same as 529 plans with 5.64% of the asset counting towards the EFC for that year.

IRA ACCOUNTS AND 401(K) PLANS:

Assets in qualified retirement plans such as IRAs, 401(k)s, 403(b)s, etc. are not reported at all on the FAFSA form and therefore have no impact on the EFC calculation.

NON-COUNTABLE ASSETS ON THE FAFSA: There are four main categories of assets that are excluded from consideration when determining a family’s financial need. These items are not reported on the FAFSA and are not counted towards the EFC for the Federal Methodology formula for federal financial aid.

Home equity in the primary residence

11 If the student will be in school for more than 4 years or plans to go to graduate school, the family may want to further delay the use of grandparent-owned 529 plan assets. 12 Note that when transferring UGMA/UTMA custodial account assets to a 529 plan, the custodial account must be liquidated first before a cash contribution is made to the 529 plan. Taxes may be triggered upon liquidation of the custodial account.

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Assets in qualified retirement accounts (IRAs, 401(k)s, 403(b)s, SEP, SIMPLE, pensions, etc.)13

Annuities

Cash value within life insurance policies

5. THE INSTITUTIONAL METHODOLOGY VS. THE FEDERAL

METHODOLOGY

The discussion above focuses solely on the Federal Methodology (FM) for determining the distribution of

financial aid from the federal government. Additionally, almost 300 private colleges use the Institutional

Methodology (IM) to determine how much financial aid is given to families from the school’s own assets

through grants, scholarships, and loans. Since the Institutional Methodology is used to determine how

schools issue aid from their own coffers, there is some variability in how each school arrives at a family’s

particular aid award. This methodology allows for flexibility around the treatment of a family’s assets

and income, so not all assets are treated using strict percentages as is seen with the Federal

Methodology.

The IM seeks to obtain a more comprehensive measure of a family’s economic strength and thus differs

from the FM in some ways. The IM does not have a specific list of excluded assets in its formula. For

example, non-qualified annuities, home equity (and debt) are counted with the IM, while all annuities and

home equity are excluded on the FAFSA form and FM. The IM will also look at whether a family is paying

for private elementary/secondary school for siblings of the student applying for aid.

The IM may also seek to examine the tax returns of parents and students. Family-controlled small

businesses with fewer than 100 full-time employees are not counted with the FM, but are counted with the

IM. Additionally in the case of divorced parent’s some schools that use the IM may require financial

information from both the custodial and non-custodial parent, while the FAFSA form only requires

financial information for the parent who the child lives with more during the year (regardless of the

actual legal custodial arrangement).

Schools that use the IM require students to complete a different more comprehensive financial aid

application known as the CSS Profile form. (These schools also require FAFSA form). The CSS Profile asks

for more detailed information about the family’s finances to get a more holistic profile, but not all the

data will be used in the EFC calculation. Some information is used for professional judgement, so when a

school is providing financial aid from its own pool of resources, it will have more information on hand to

make a decision of aid for a specific family’s circumstances.

The schools that require the CSS Profile form are predominantly selective private colleges, however the

University of Michigan and University of North Carolina at Chapel Hill are two notable examples of state

universities that require the CSS Profile form. A list of schools that require the CSS Profile can be found on

the College Board website: https://student.collegeboard.org.

TWO FORMULAS, TWO EFC AMOUNTS: Students applying to schools using the CSS Profile form will have their federal aid determined by the FM

(based on the FAFSA), and their university-awarded aid determined by the IM (based on the CSS Profile).

13 Assets in these retirement plans are not counted, but contributions made in the previous year to qualified retirement plans are added back in to your adjusted gross income are counted in the income portion of the formula.

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14 Given that the two formulas calculate EFC differently, it’s very common for the family’s EFC to vary

under each formula. Also, since the qualification for financial aid is determined in part by the cost of

each school, it’s also possible that a family may qualify for financial aid at one school, but not at another

school. For example, if a family’s EFC is $35,000, and the student applies to a school that costs $30,000,

they will not qualify for aid; however if the student also applies to a private school costing $55,000, they

will qualify for $20,000 of financial aid at that school.

TWO FORMULAS, TWO EFC AMOUNTS: Parents will want to be aware of the specific forms and formulas used by the schools your children are interested in. This will help with an understanding of how family income and assets are going to be treated under the different formulas. For example, families may look at the fact that the FAFSA form does not consider annuities, and be tempted to re-position some cash (a counted asset) into an annuity product (a non-counted asset) to improve their chances of getting financial aid. However, if the student is considering schools that also use the CSS Profile, that annuity asset is going to be counted at those schools anyway. Furthermore, the family may have placed a liquid cash asset into an annuity and compromised the liquidity of that money. Additionally, it’s important to understand that lowering your EFC and yielding a higher demonstrated need does not always mean that the need is met, and when the need is met, not all the aid is in the form of grants and scholarships. A portion of each financial aid award will almost always include student loans, which have to be paid back. Recall the discussion above about net cost. It’s possible that schools may offer the same total aid award, but have different amounts of loans that comprise the total award. It’s also possible that a pricey private school with a high cost of attendance, but typically pledges to meet 100% of demonstrated need, might not be that much more expensive, on a net cost basis, than your in-state public university, which may only meet 65% of demonstrated need with financial aid. Parents should also be aware of common myths surrounding financial aid and paying for college. One such myth is the notion that you shouldn’t bother saving for college since your savings will eliminate getting any financial aid. It is true that most assets factor into the formula, but the EFC calculation is predominantly determined by the parent’s income, with less emphasis on assets. Saving for college expenses is still the recommended strategy and will minimize the need for loans. Consider that if a family had $250,000 of reportable assets, and an asset protection allowance of $30,000, they’d be expected to contribute 5.64% of $220,000 or $12,408 for that year. Another common myth is that a family is “too rich” to qualify for aid. Note that a family’s EFC is calculated as a single number regardless of how many children you have attending school. When a family has two children in college at the same time, the EFC is split across the students. So a family with a high EFC of $60,000 may not qualify for aid with one child in school, however that EFC becomes $30,000 for each child if they have two children in college. If both students attend schools that cost more than $30,000, they will qualify for some aid for both children.

14 Mahaney, James, “Paying for College: A Practical Guide for Families,” Prudential, 2016.

EDUCATION PLANNING

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DOING YOUR HOMEWORK: There is no shortage of information available for families to stay informed about saving for college and how the financial aid process works, (see the Helpful Websites box for resources). It’s recommended that families try to set clear financial goals regarding their education funding and how that is aligned with the rest of their financial plan. Students can contribute by searching for any available grants and scholarships, while parents should be aware of how their savings and income will impact their potential for getting aid. It’s also important to understand the typical aid packages awarded by the schools they are interested in. Like any other major expense or investment, being an informed consumer will lead to more successful outcomes.

SUMMARY

We hope that you found this whitepaper on Education

Planning to be helpful and informative.

If you would like to discuss your personal financial

situation, please do not hesitate to give our office a call at

(978) 624-3000. We would be happy to talk to you.

Sincerely,

David Juliano CLU, ChFC, RICP Senior Financial Advisor David@stonehearthcapital.com

Jamie A. Upson, CFP®, CMFC, AAMS

President & CEO

Jamie@stonehearthcapital.com

HELPFUL WEBSITES

Savingforcollege.com Information and articles about 529 plans, saving for college, financial aid, and scholarships. Also includes some calculators.

Finaid.org Information about financial aid, student loans, scholarships, the admission process, featuring articles, tools, and calculators.

Fastweb.com Scholarship search tool that compares a student’s background with available scholarships to find potential matches.

Fafsa.ed.gov U.S. Department of Education website for families to complete and file the FAFSA, and get information about the FAFSA process.

Collegeboard.org Website to complete and file the CSS Profile form and also contains information about the SAT tests, and a scholarship search tool.

Collegedata.com Information to help research and compare percentage of need met with aid packages awarded by schools with the College Match tool. Also a net price calculator and

scholarship finder.

EDUCATION PLANNING

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Footnotes and disclosures:

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